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Nominally Sovereign Debt, Risk Shifting, and Reputation

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  • Herschel I. Grossman
  • John B. Van Huyck

Abstract

This paper analyzes a reputational equilibrium in a model in which nominally denominated sovereign debt serves to shift risk associated with the unpredictability of tax revenues from the sovereign to its lenders. The analysis answers the following set of related questions: Why would a sovereign refrain from inflating when faced with servicing a large quantity of nominal debt? If a sovereign does not plan to use inflation to repudiate its nominal debts, why would it want to issue nominal debt in the first place? What are the distinguishing features of those sovereigns who are willing and able to issue nominal debts?

Suggested Citation

  • Herschel I. Grossman & John B. Van Huyck, 1987. "Nominally Sovereign Debt, Risk Shifting, and Reputation," NBER Working Papers 2259, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2259
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    References listed on IDEAS

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    1. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
    2. Herschel I. Grossman, 1987. "A Generic Model of Monetary Policy, Inflation, and Reputation," NBER Working Papers 2239, National Bureau of Economic Research, Inc.
    3. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    4. Lucas, Robert Jr., 1986. "Principles of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 117-134, January.
    5. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-1097, December.
    6. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Amnon Levy, 1997. "Sovereign debt: Reputation, seizure and reputation," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 21(1), pages 69-79, March.
    2. Kang Yong Tan & Prasanna Gai, 2004. "Good Housekeeping? Reputation, Fixed Exchange Rates, and the 'Original Sin' Problem," Econometric Society 2004 Far Eastern Meetings 446, Econometric Society.
    3. Herschel I. Grossman, 1988. "The Political Economy of War Debts and Inflation," NBER Working Papers 2743, National Bureau of Economic Research, Inc.
    4. Herschel I. Grossman, 1987. "Lending to an Insecure Sovereign," NBER Working Papers 2443, National Bureau of Economic Research, Inc.

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